Business Context and Reporting Period
Seadrill Limited filed this Form 6-K on February 23, 2022, reporting unaudited second-half 2021 results for the six months ended December 31, 2021. Seadrill provides offshore drilling services through owned, leased and managed rigs. Reported continuing operations exclude Seadrill New Finance Limited and its subsidiaries, which were classified as discontinued operations and held for sale.
- Seadrill emerged from Chapter 11 on February 22, 2022; Seadrill New Finance Limited emerged on January 20, 2022, with Seadrill retaining a 35% interest.
- Owned fleet: 14 rigs operating at December 31, 2021, with 95% technical utilization and 93% economic utilization.
- Managed or leased fleet: 11 rigs operating, with 97% technical utilization.
Financial and Operating Metrics
| US$ millions, except percentages and per-share data | 2H21 | 1H21 | Change |
|---|---|---|---|
| Total operating revenue | 556 | 452 | 23% |
| Adjusted EBITDA | 118 | 20 | 490% |
| Adjusted EBITDA margin | 21.2% | 4.4% | Up 16.8 percentage points |
| Operating profit/(loss) | 95 | (252) | Improved by 347 |
| Net profit/(loss) | 18 | (605) | Improved by 623 |
| Net cash used in operating activities | (72) | (64) | Outflow increased by 8 |
| Net cash provided by/(used in) investing activities | 20 | (6) | Improved by 26 |
- Full-year 2021 revenue was $1.008 billion versus $1.059 billion in 2020. Full-year net loss was $587 million versus $4.663 billion in 2020.
- Revenue growth in 2H21 primarily reflected rigs returning to work under new contracts, including West Phoenix, Sevan Louisiana and West Gemini, as well as lower downtime.
- Operating expenses decreased to $548 million from $566 million despite higher rig activity, aided by lower COVID-19 costs, cost reductions and the absence of a $48 million credit-loss charge recorded in 1H21.
- Other operating items contributed $87 million of income in 2H21, including $36 million of rig-sale proceeds and $51 million of other income, including cancellation-of-debt income and an insurance-premium rebate.
- Financial and other non-operating expense was $119 million, including $75 million of Chapter 11 restructuring fees.
- Net profit included a $36 million gain from discontinued operations, primarily from a reversal of credit-loss allowances related to SeaMex; management stated this gain was one-time and not expected to recur.
- Cash and cash equivalents, including restricted cash, were $535 million at December 31, 2021, comprising $312 million unrestricted and $223 million restricted cash. Unrestricted cash declined from $422 million at June 30, 2021.
- Restricted cash included $63 million for a Brazilian tax case, $47 million of rig-sale proceeds securing senior credit facilities, $42 million for drilling-contract guarantees and $37 million related to West Linus and West Hercules lease arrangements.
- At December 31, 2021, liabilities subject to compromise were $6.235 billion and total deficit was $3.716 billion. These debtor-in-possession balances were affected by the subsequent restructuring.
Material Changes Versus the Prior Comparable Period
- Compared with 1H21, 2H21 revenue increased 23%, adjusted EBITDA increased from $20 million to $118 million, and the adjusted EBITDA margin increased from 4.4% to 21.2%.
- Operating results improved as previously idle rigs commenced contracts and fleet utilization strengthened; the jack-up fleet achieved 100% technical utilization.
- Six long-term cold-stacked rigs were sold in 2H21, and West Venture was sold after the reporting period for recycling. Two additional units, Sevan Brasil and Sevan Driller, were identified for disposal in 2022.
- Order backlog was approximately $2.7 billion at December 31, 2021, up from $2.1 billion at June 30, 2021. After a $0.5 billion reduction related to the amended West Linus lease, reported backlog was approximately $2.2 billion as of February 23, 2022.
- Petrobras contracts for West Tellus, West Carina and West Jupiter added approximately $775 million of backlog, with commencement dates extending from September to December 2022.
- Through the restructuring, external credit-facility obligations were reduced from $5.662 billion to $683 million of reinstated debt maturing in 2027, and $350 million of additional liquidity was raised.
Guidance, Outlook, Risks and Unusual Items
- Management said the offshore drilling recovery was beginning to take shape as oil prices strengthened and expressed confidence in the sector trend for 2022 and 2023, when rig re-contracting is expected to become more important.
- Following emergence, Seadrill reported $486 million of cash, including $335 million unrestricted and $151 million restricted, plus $125 million undrawn under a new revolving credit facility. Total debt obligations were $908 million, consisting of $683 million of reinstated credit facilities, $175 million drawn under a new term loan and a $50 million convertible bond. Reported post-emergence net debt was $422 million.
- West Hercules and West Linus lease arrangements were amended to substantially reduce future obligations; both rigs were expected to be returned to SFL in 2022. SFL-leased rigs and certain Aquadrill-managed rigs were also expected to be handed back during 2022.
- Management continues a cash-preservation and cost-efficiency program and stated that cold-stacked rigs will be reactivated only where contracted work and expected returns justify the investment.
- Key risks include offshore drilling supply and demand, day rates, contract awards and mobilization, rig maintenance and reactivation costs, customer payment disputes, liquidity and financing access, compliance with covenants, oil-price volatility, COVID-19 effects, restructuring execution, tax and environmental matters, cybersecurity, climate-related regulation and operational downtime.
- Adjusted EBITDA is a non-GAAP measure and should not be considered an alternative to operating income or other US GAAP performance measures.
Facts Investors Should Verify
- Confirm the final post-emergence capital structure, debt terms, maturity profile, revolver availability and unrestricted cash, as the December 31 balance sheet predates the February 2022 emergence.
- Reconcile the filing’s backlog figures: approximately $2.7 billion at year-end before the West Linus adjustment versus approximately $2.2 billion after the adjustment as of February 23, 2022.
- Assess whether the improved 2H21 utilization and EBITDA are sustainable after one-time rig-sale gains, debt-cancellation income, restructuring effects and the discontinued-operations gain.
- Review the treatment and ongoing economics of the 35% retained interest in Paratus Energy Services and the related discontinued operations.
- Evaluate liquidity needs for rig reactivations, contract mobilizations, maintenance, lease returns, restricted cash and ongoing restructuring-related obligations.
- Verify the status and commercial consequences of the planned 2022 rig disposals and the return of leased or managed rigs.